At double the original projections, deficit adds burden to looming budget negotiations; politicians slam gov't in wake of data.

The final budget deficit for 2012 hit 4.2 percent of GDP, the Finance Ministry announced Sunday, blowing the 2% deficit originally planned for 2012 and the 3% deficit target out of the water and highlighting difficult choices ahead for post-election budget talks.

According to the data, in the past two years the annualized deficit only hit or dipped below the 3% goal during four months.

The shortfall casts a shadow over impending negotiations for the 2013 budget, which will be the first order of business for the government that forms after the January 22 elections. Before even taking the deficit into account, the government will have to cut some NIS 15 billion from funds it already laid out just to keep spending within the legal limit. Then it will need to set out a credible path toward meeting its deficit target.

Failure to do so could spook investors and raise the cost of borrowing money.

With voting only days away, the deficit announcement was fresh meat for hungry politicians.

Bayit Yehudi leader Naftali Bennett called the deficit irresponsible.

“Although the government knew it was taking in less, it continued to distribute more money and committed itself to increased expenditures of NIS 30 billion next year,” he said. “The state’s budget does not belong to the government, but to us. We pay taxes and we deserve a government that won’t behave extravagantly.”

Sunday’s data showed that in 2012, the government spent NIS 39b. more than it took in, mostly because the slowing economy meant fewer tax revenues. While the 2012 budget projected only a NIS 18.3b. deficit, revenues fell NIS 18.5b. short. In addition to the missing revenue, the government ramped up spending an extra NIS 2.2b.

Labor leader Shelly Yacimovich called the deficit a testament to the “social hell and economic chaos” that would ensue in Israel if Netanyahu is reelected. “Over and over again, Netanyahu sets deficit targets that he is unable to meet. In the meantime, he is digging a deep hole that he plans to fill with the decreasing funds of the poor and middle class.”

Partway through 2012, Prime Minister Binyamin Netanyahu and Finance Minister Yuval Steinitz adjusted the deficit target and imposed a series of tax hikes after updated projections exposed a gaping hole in the budget. Ultimately, they still fell behind, but some of the tax hikes laid out over the summer, such as increased income taxes, only came into play at the start of 2013.

Yesh Atid leader Yair Lapid said Netanyahu was wrong to think that raising taxes would rectify the deficit, blaming the government for outsized spending on interest groups.

“In reality, imposing taxes on the middle class and small businesses only strangles Israel’s economy,” he said.

“Before turning the middle class into the treasury’s ATM, we should first cut the budgets of haredim in the settlements and our bloated, wasteful government.”

In late December, Bank of Israel Governor Stanley Fischer warned that the rising deficit made him, “very uneasy,” noting that in the case of a recession, it would become an unwieldy problem.

“We’re at full employment now, and that’s a large deficit to have in this situation,” he said, adding that he would prefer additional tax increases rather than see the deficit continue to grow.

Former foreign minister Tzipi Livni said on Sunday that “Netanyahu continues to operate under outdated economic views that have failed the world over, and has now proved that burden on the middle class and unbearable indirect taxes not only didn’t benefit the state coffers, but actually hurt them.”

The Tzipi Livni Party leader then called for reprioritizing the political process with the Palestinians, saying that continued deadlock would lead to further economic deterioration.

“Israel is a country dependent on its exports, and sits on the eve of boycotts and political isolation that discourage investment in it,” she told The Manufacturers Association of Israel.

Correction:

An earlier version of this article incorrectly stated 929.8b. was the size of the total budget. It is, in fact, the size of Israel's annual GDP. Apologies.